Ex-Dow Scientist Admits to Economic Espionage, U.S. Says

An ex-Dow AgroSciences LLC researcher pleaded guilty to economic espionage in connection with the theft of trade secrets from his former employer to benefit a Chinese university, the U.S. Justice Department said.

Kexue Huang, 48, also admitted to stealing trade secrets from the Minneapolis-based grain distributor Cargill Inc., the U.S. said in a press statement today.

“Mr. Huang used his insider status at two of America’s largest agricultural companies to steal valuable trade secrets for use in his native China,” Assistant U.S. Attorney General Lanny Breuer said in the statement.

Huang entered guilty pleas today in two separate criminal cases before U.S. District Judge William T. Lawrence in Indianapolis. Financial losses from his conduct exceed $7 million, the U.S. said.

His attorney, James Edgar of Indianapolis, didn’t immediately reply to voice-mail and e-mail messages seeking comment on the pleas.

Huang worked for the Indianapolis-based unit of Midland, Michigan-based Dow Chemical Co., where he researched the development of organically derived pesticides, from 2003 to 2008. He then went to work for Cargill as a biotechnologist.

Two People

While at Dow, he shared confidential information with at least two people, one of whom conducted research first at the Hunan Normal University in China and later in Dresden, Germany, according to a plea agreement that didn’t name the people.

In stealing, transferring and using Dow trade secrets, Huang “intended to benefit” Hunan Normal University and the National Science Foundation of China, according to the plea agreement. Each of those institutions is controlled by the Chinese government.

A U.S. grand jury in Indianapolis indicted Huang on 17 counts in June 2010. A separate federal grand jury in Minnesota returned a single-count indictment accusing him of stealing a trade secret related to food processing from Cargill in November. That case was transferred to Indianapolis, where it was unsealed today.

Huang also admitted to sharing information taken from Cargill with a Hunan Normal University student.

“Cargill is pleased the case has been resolved,” a spokeswoman for the company, Lori Fligge, said in an e-mailed statement.

Ten Years

Garry Hamlin, a Dow spokesman, said it can take more than 10 years for the technology Huang tried to obtain to reach the market.

“Dow AgroSciences has analytical technology and processes in place to identify third-party product produced with proprietary technology stolen by Mr. Huang,” Hamlin said in an e-mailed statement. Dow is strengthening security measures to protect its technology and seeking to ensure that counterfeit products derived from it never find a market, said Hamlin.

The crime of economic espionage is punishable by as long as 15 years in prison, and trade-secret theft carries a maximum term of 10 years, the Justice Department said.

“Today’s plea underscores the continuing threat posed by the theft of business secrets for the benefit of China and other nations,” Lisa Monaco, assistant U.S. attorney general for national security, said in the Justice Department’s statement.

The Chinese embassy’s press attache in Washington also didn’t immediately reply to an e-mailed request for comment.

The cases are U.S. v. Huang, 10cr102 and 11cr163, U.S. District Court, Southern District of Indiana (Indianapolis).

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The next Nobel Prize

Monday, the next "Nobel Prize" in Economics will be announced and everybody is playing a game of predictions, so why not me? I have a wish that happens to coincide with my prediction: William Nordhaus.

Why? Because environmental economics has been long rumored to get it and it deserves to be recognized. Within that field, Nordhaus has made major contributions that brought this field to the mainstream. And he is a genuinely good guy, always helpful and willing to listen to you or help you out. Also, the signals I have been receiving from members of the Prize committee is that they really like his work.

I am afraid, though, that he may have to share his work with Martin Weitzman. Who has made the more seminal contributions to the field can be discussed, but Weitzman is all the opposite in terms of attitude. In addition, I do not like his way of trying to make a name of himself, like I showed previously. He has also been caught and punished for stealing horse manure, so his ethical standards are definitively not up to par.

Marx and Solow

For all the justified criticism one can have about the work of Karl Marx and the economic system that resulted from it, old Karl was onto something. The Industrial Revolution saw the rise of a new class, the capitalist, that generates a smaller share of its income from manual work and instead uses its brain and capital. That is in terms of welfare a positive evolution, were it for the fact that workers hardly had it better compared to their previous agricultural life and thus did not get a share of the new riches. What especially irked Karl Marx was the lot of the workers could not improve, either because they were not getting a larger share of income, or because there was no path to become capitalists themselves in large numbers, something later termed as a lack of social capilarity.

Jørgen Heibø Modasli finds some of these features in a model inspired by the Solow growth model, augmented by incomplete markets that require that one cannot borrow to become a capitalist entrepreneur and that the entrepreneur can only work for himself. This introduces a non-convexity and quickly a two-class system emerges, with workers not having any reason to save much as they have no chance to become capitalists. Also, the class division persists over time, even when credit and capital markets improve.

Yet, this is not entirely convincing. Indeed, economies with less incomplete markets, say, the United States, should see less inequalities, and inequalities should have declined over time as markets developed. This is hardly what we can see in the United States, where access to credit is widespread, yet income inequalities are high and growing, and social capilarity is largely absent.

Politicians and leisure

When you think about leisure in the utility function, for most applications you need to take a stand on some properties: is the income effect larger than the substitution effect? Is leisure a normal good in the first place? Convincing empirical evidence is surprisingly difficult to find: read the endless debate between microeconomists and macroeconomists about the size of the wage elasticity. This may be an aggregation issue, but maybe we are lacking a clear natural experiment.

Naci Mocan and Duha Altindag report on an interesting change in the way members are paid in the European parliament. Whereas previously they were compensated at wildly different levels by there home countries, since July 2009 they get money according to a uniform rule: 38.5% of a European judge's salary as a base, plus a per diem when present. Mocan and Altindag then use the difference between and with the previous schemes to highlight that an increase in the base reduces attendance (yes, the income effect! Leisure is normal!) and an increase in the per diem increases attendance (the substitution effect is larger than the income effect). Politicians are rational after all.

Mandatory health insurance and informality

Insurance suffers chronically from the problem that only bad risks want to get insured, which makes the cost of insurance prohibitive and the insurance market often collapses while its presence would be a clear welfare improvement. A workaround is to force everyone to participate, thereby avoiding that good risks could weasle out. This is the principle behind helath insurance mandates in most of the Western world, and it is part of the so-called Obamacare. But such mandates are difficult when there is a large informal economy, as it makes difficult tracking people, especially if access to government services, paying taxes, etc. are the way the mandate is enforced. Could in fact a mandate increase informality?

Reyes Aterido, Mary Hallward-Driemeier and Carmen Pagés look at Mexico and ask a somewhat different question, but it is still informative: Does the provision of health insurance to those without social security (mostly informals) increase informality? They find the formal sector decreased by 0.4 to 0.7% points because fewer people join it. It is not surprising that fewer people see the need to be cover by social security and thus declared their jobs, yet I find it interesting that the effect on formality is so low in a country where it is so easy to disappears from the books. Transpose that to, say, the US, where having a job is currently pretty much a requirement for health insurance coverage. Would then a health insurance mandate lower the incentive to have job? Most likely yes, but seeing how small the impact was in Mexico and considering that the lower elsticity of the formal/informal margin in the States, that effect is very likely to be very small.

About a (partial) return to the gold standard

In difficult times, it is easy to blame central banks for everything. Part of their role, after all, is to play the scape goat for policies the politician do not dare implementing. But then, there is only so much the central banks can do, as Europe and the United States no "nicely" show now. A substantial ingredient in the blame game is a call for a return to the gold standard, a nostalgia for supposedly better and easier times.

Olivier Ledoit and Sébastien Lotz echo this call and study what our current understanding is about the coexistence of fiat and commodity money. In principle, we can start from the idea that currency competition is good: this would force the central bank to be more careful with its fiat money. Indeed, we have learned from money search theory that bad money does not necessarily chase good money (the old Gresham's Law). Also, if the commodity has a positive return, its monetization is benefitial as long as its storage and transaction cost is sufficiently low. The question is then on how to find a commodity that has a real return from just sitting there. There is a larger problem, though, with small denominations. How do you mint coins measured in cents when the commodity is, for example, gold? Either the coins need to be very small or they have very small commodity content, to the point that they become ... fiat money. Monetary policy also becomes tricky, as quite obviously temporary easing becomes difficult if it risks driving fiat money out.

But in the end, isn't a commodity like gold only valuable because people believe it is valuable? Gold, to take an extreme and popular case, has little intrinsic value, as I argued before, and is thus just another fiat currency. It is all a question of perception.

Monetary and fical policy cooperation in a liquidity trap

We are living interesting times in terms of macroeconomic policy: the world faces big shocks and substantial challenges, and many current circumstances have no historical precedents. This means that policy makers cannot draw from experience and need to invent new policies from somewhere better than their guts. And after a few hesitations, theory is now in much better shape to answer questions from policy makers. For example, what should one do when there is a liquidity trap in a globalized economy, especially if the trap itself is globalized?

David Cook and Michael Devereux show how, and it borders on a political miracle. Not only does one need to get the cooperation of fiscal and monetary authorities (something the US is not close to acheiving) but one needs the cooperation across countries even if it entails some costs to the "winners" (something the Chinese have so far refused and the Swiss recently abandoned).

Specifically, Cook and Devereux show that with so many countries currently with negative real interest rates, we have a worldwide liquidity trap. In an open economy, the policy prescription differs from a closed economy. If there is a negative demand shock, fiscal policy needs of course to raise aggregate demand, but with a global economy, this can come from anywhere in the world and thus a coordinated fiscal policy is due. But to channel the impulse to the relevant countries, monetary policy coordination is necessary to raise interest rates in the foreign countries, even if they are in a liquidity trap. And this takes some serious courage. One can always dream.

Should small businesses be encouraged?

Small businesses are thought to be rather inefficient because of fix and because of other issues that hamper the exploitation of increasing returns to scale in their size range. Yet, policies keep popping up that try to protect them. Why? Is it nostalgia, throwing us back to times were "better?" Or do we want to protect (inefficient) employment? Even this may be moot according to a previous post.

Ben Craig, William Jackson, and James Thomson claim that small businesses should be encourage because they have an inherent disadvantage on credit markets: there are information problems, more acute in downturns, that make access to credit more difficult for small businesses. Thus, it is good for a government agency to provide loan guarantees. Still, this does not address why we would want to have small businesses in the first place. If inefficient firms are getting rationed on credit markets, I am fine with that.

On the size of cities

There is an active literature that tries to explain the size distribution of cities. It is based on a strong regularity, that the distribution follows a Zipf law (population rank times population is constant). Models try to explain this fact with rather simple structures and then back out what assumptions are needed to obtain the Zipf law, with little regard whether these assumptions make much sense. This is not how someone usually proceeds. While you indeed want to explain a fact, you use believable assumptions and then draw a theory and check whether it can replicate the fact. Also, you not want to have a model with many degrees of freedom to explain a single fact, you want to check on many aspects from the data.

Marcus Berliant and Hiroki Watanabe share this concern. They point out that the current theories assume that households cannot insure against city-level shocks, which are at the heart of the models. This is important, because insurance and moving can be considered substitutes. If some insurance is available for example through self-insurance, then there is little reason to move, especially given the empirically large costs of doing so, and all that matters are the initial conditions. In order to obtain more sensible results, Berliant and Watanabe assume that city-specific shocks leads to a winner-takes-all outcome: the best city gets to produce everything within a sector. Then insuring is inferior to moving, as the first yields only a partial wage while the latter a full wage. The availability of partial insurance does not change this. In some sense, the presence of insurance does not matter in this model, while it matters in others. But this relies on the extreme risk that is assumed. Have we progressed? I am not sure.

Bruno Frey's academic utopia

Bruno Frey has fallen into disgrace these days as he has been shown to play dangerous games of self-plagiarism, submissions to multiple journals and hypocrisy in describing the perverse incentives facing researchers. I have argued recently that he is living in a bubble that has now popped.

Apparently not. With this wife Margit Osterloh, he just authored a paper about the impact of rankings on academic publishing. Their argument is that the current emphasis on rankings pushes academicians to privilege publication to science. They want to decouple funding, tenure and promotion from any evaluation metric. Rather, scientist should be carefully selected at their initial appointment and then be given guaranteed funding and only be asked to evaluate themselves. This strikes as a very utopian view of academia, and in particular a view that surprisingly ignores the impact of incentives on motivation. While the Frey and Osterloh utopia may yield in a few cases the expected very innovative researchers willing to take substantial risks along new paths, most would free-ride to a large degree. The best example of this is the French system of "research associates" on the national research foundation, who are appointed right after their doctorate for a lifetime position of researcher with no other significant duties. While this system has yielded some success stories, the research impact of these associates is rather dismal compared to researchers elsewhere who are subject to regular evaluations using publication metrics.

Reading through the paper, I could not resist to see the irony in many of the arguments, where Frey could be really writing about himself. A few quotes:

In academia, examples can be found (e.g. the ‘slicing strategy’) whereby scholars divide their research results into a ‘least publishable unit’ by breaking the results into as many papers as possible in order to enlarge their publication list.

Of course, Bruno Frey and his students are big specialists in slicing.

there is evidence showing that academics with the highest score in publication rankings score only modestly in a ranking based on their contributions in editorial boards (Rost and Frey, 2011).

Note that Frey was kicked off an editorial board for resubmitting a published paper elsewhere.

For example, a broad and international selection of reviewing peers is necessary in order to avoid cronyism.

Frey's colleague Ernst Fehr recently anointed one of his students with the most prestigious prize for an European economists. Frey and Osterloh argue that awards cannot be manipulated, while citations metrics can. I do not think this is true, in fact awards are easier to manipulate because they are determined by small committees. Citations come from the whole research community.

Another example is editors who encourage authors to cite their respective journals in order to raise their impact rankings

Frey requires this for acceptance in the journal he co-edits, Kyklos. At least, the paper does not mention self-plagiarism this time.

Is this paper a mea culpa? It certainly does not read that way. As in his previous writings on the publishing game, he comes across as someone about it all, who tell everyone how things should be while claiming the moral high ground. The paper was completed on August 24, 2011, thus well after all the conflagration about the hypocrisy of Bruno Frey, yet it does not show anything about it. Bruno Frey has not learned a thing. And, do you want to bet that he is submitting this to journal, taking away space that young researchers need to get publications for tenure, as he has argued before? In fact this particular paper would fit much as a blog post than into a journal.

Addendum: And they are doubling up with another paper, entitled "Input Control and Random Choice - Improving the Selection Process for Journal Articles" with the following abstract:

The process by which scholarly papers are selected for publication in a journal is faced with serious problems. The referees rarely agree and often are biased. This paper discusses two alternative measures to evaluate scholars. The first alternative suggests input control. The second one proposes that the referees should decide only whether a paper reaches a minimal level of quality. Within the resulting set, each paper should be chosen randomly. This procedure has advantages but also disadvantages. The more weight that is given to input control and random mechanism, the more likely it is that unconventional and innovative articles are published.

You read it right: instead of peer review, they advocate complete tyranny by editors who randomize over a select set or, alternatively, to decide early who is worthy publishing and then let the chosen few do as they wish. Which is how Bruno Frey and his lackeys have been operating. But at least Frey and Osterloh have had the decency to withdraw that last paper (which is why I print the abstract above).

Ethnic heterogeneity and natural disasters

Some countries seems to be very poorly located, as they are in the path of all sorts of natural disasters. But some do better than others in coping with their perilous situation. In particular, death tolls from cataclysms seems to be, in general, of an order of magnitude larger in developing countries. What else could influence such numbers?

Eiji Yamamura, from a rich and homogeneous country that does quite well with earthquakes, tsunamis and typhoons, studies ethnic heterogeneity in two different ways in this regard. The first is ethnic polarization, which describes how close the distribution of ethnic group is from a fifty-fifty one, and ethnic fractionalization, which can be interpreted as the probability that two random people are from the same ethnic group. Once one adds the miracle instrument of cross-country regressions, legal origins, the first indicator has shows that heterogeneity has a positive impact on natural disaster deaths (meaning more of them), while the second has none.

Now Yamamamura takes this as a sign that ethnic polarization is a better indicator of ethnic heterogeneity than ethnic fractionalization. This looks like some seriously flawed reasoning here, which is repeated several times in the papers: the fact that some indicator tests favorably some hypothesis does not necessarily mean that it measures what the hypothesis says. What if in really the hypothesis is false? And in any case, on what theory would this hypothesis be based? I can easily imagine good reasons why homogeneity would lead to fewer deaths, a better social cohesion that leads to better institutions coping with disasters, like in Japan.

How to publish prolifically

I dedicated several posts to Bruno Frey and his chronic self-plagiarism. In retrospect, one should have seen that something was fishy from the mere fact that he was simply publishing too much for it to be normal, 600 articles by his own count. It is not possible for an academic, at least in Economics to be that productive. Yet, there are some who seem to be on a similar path.

Take, for example, Michael McAleer. He is an Australian econometrician who had a very respectable career in the 1980's, publishing in the AER with Adrian Pagan (and a homophone of Paul A. Volcker), four Review of Economic Statistics, a Review of Economic Studies, an Economic Journal and plenty of other decent publications. McAleer get elected into the Academy of Social Science in Australia in 1996. Then the quality of the publications dips, as he must be facing the same loss in productivity so many in the profession suffer in their forties. Still a good stream of publications.

Then suddenly, a burst of historic proportions.

Let us first look at working papers. According to his RePEc page (that is all I could find, a 2004 CV has 32 pages despite having no publications listed): 12 in 2008, 45 in 2010, 39 in 2010, and so far 15 in 2011. And these are according to their titles, at least, distinct papers. How can one do this? First McAleer has many co-authors, but he is no Paul Erdős, as his has a small set of regular collaborators. Second, many of the papers are about the same theme, with small variations: journal impact, with applications to neuroscience, tourism studies, econometrics, and economics in general, including one that I discussed. There is nothing wrong with this, except that entire sections are copy-and-pasted from one paper to the next. His other papers, for example on tourism demand in the Far East, are incredibly thin slices of research.

But these are all working papers, and he is free to write all this as long as he does not pretend this is all original and substantially new work when submitting to journals that have such requirements. McAleer is, however, also publishing avidly, although luckily few of the papers mentioned above get placed, and then only poorly. In terms of publishing, he has found another niche, the Journal of Economic Surveys:

• 2011, issue 2: 1 article
  
• 2011, issue 1: 2 articles
  
• 2010, issue 1: 2 articles
  
• 2009, issue 5: 2 articles
  
• 2007, issue 5: 1 article
  
• 2006, issue 4: 3 articles
  
• 2005, issue 5: 1 article

The journal has 5 issues a year, averaging 7 articles in each issue. That is a remarkable publishing success in a generalist journal. It turns out frequent co-author Les Oxley is the editor, who himself does not hesitate to frequently publish in his own journal. I counted 17 articles of non-editorial nature, several over 60 pages long, as well as 7 reports on conferences he attended.

A good number of those articles are titled "The Ten Commandments of ...", which I find rather pretentious. I was curious about The Ten Commandments for Academics, which could reveal some of the motivations of McAleer. They are:

1. choose intellectual reward over money;
2. seek wisdom over tenure;
3. protect freedom of speech and thought vigorously;
4. defend and respect intellectual quests passionately;
5. embrace the challenge of teaching undergraduate students;
6. acknowledge the enjoyment in supervising graduate students;
7. be generous with office hours;
8. use vacation time wisely;
9. attend excellent conferences at great locations;
10. age gracefully like great wine.

What I find interesting here is what was not considered. I think a better alternative, and one that would condemn much of what McAleer is doing, are due to Wesley Shrum:

1. Thou shalt not work for deadlines;
2. Thou shalt not accept prizes or awards;
3. Honor thy forebears and colleagues regardless of status;
4. Thou shalt not compete for recognition;
5. Thou shalt not concern thyself with money;
6. Thou shalt not seek to influence students but to convey your understandings and be honest about your ignorance;
7. Thou shalt not require class attendance or emphasize testing;
8. Thou shalt not worry about thy own intelligence or aspire to display it;
9. Thou shalt not condemn those with different perspectives;
10. SEEK TO UNDERSTAND THE WORLD.

These are principles about integrity, about changing the world and putting the scientific interest ahead of oneself. McAleer, rather, seems keen on clogging journals and working paper series with useless drivel, showing off and self-plagiarizing. At least for the latter part of his career, I do not see a positive externality from his efforts.

To come back to my initial question, to be prolific: find willing co-authors and editors, slice thinly, copy-and-paste, and do not think too hard what academia is about.

The Internet makes you happy

We have previous established that the Internet, contrarily to conventional wisdom, makes people more social. Does this also mean that people with Internet access are happier? Of course, one should take into account that those without Internet, at least nowadays, are likely to face hardships like low income and education.

Thierry Pénard, Raphaël Suire and Nicolas Poussing do such an analysis for Luxembourg and find indeed that Internet users are happier, especially among those with lower incomes. This is also true when taking into account the intensity of Internet use. This implies that making the Internet accessible to lower socio-economic classes can improve welfare, possibly significantly. Of course, one has to take with a grain of salt studies of happiness based on surveys that ask for subjective self-evaluations. That grain of salt may be bigger when one considers who small Luxembourg is. The approach then becomes similar to the randomized experiments in the development literature where results for a small set of villages are difficult to apply to other contexts. Yet, Luxembourg is surprisingly diverse, so maybe these results are generalizable. Readers, you can now safely that you are now happier from being on the Internet and reading this.

One more perversion of employer-based heath insurance

Whenever you see risk, you think insurance. And there are different ways to insure yourself. This may be by buying some contingent claims, often bundled into an insurance policy. Or this may be through self-insurance, whereby you build some assets for eventualities beyond savings needs. Formal insurance and self-insurance sure look like substitutes. For the case of health risk, this means that people with formal insurance should have less assets, other personal characteristics being controlled for. This statement is, however, factually wrong: insured people, ceteribus paribus, have more assets. That is difficult to square with standard theory.

Minchung Hsu makes a good attempts at solving this puzzle. The major assumption here is that health insurance is provided through employment (there is also private health insurance, but it is of minor importance, as in the data because it is crowded out by social programs). This means that the loss of employment bears a larger risk for someone who formally insures: one may loose income and insurance. Then, ironically, more self-insurance is needed than for someone who self-insures, but one has also to keep in mind that a self-insurer typically has lower income and is partially covered by social programs. Thus Hsu performs the same regressions as done in the literature and still finds the fact mentioned above. Interestingly, his regression also rejects the existence of precautionary savings, while it is the central element of the model. So much for the power of this test.

The fall of internal migration

It is costly to move, and those costs vary by culture and economic circumstances. International migration is of course hampered by immigrations laws and cultural barriers. But in most countries, internal migration is free and only restrained by costs and some degree of local attachment. In this respect, Americans are considered to be the most mobile, as they are very willing to drop everything to pursue better opportunities while the housing market is, usually, very fluid. In fact, the perception is that this mobility has even increased in the US and that it has been hampered only in the last few years, due to the current difficulties in selling homes.

Raven Molloy, Christopher Smith and Abigail Wozniak take a close look at the data and dispel some of those perceptions as myths. In fact, US internal migration has been in a steady decline for thirty years, a decline that in apparent whichever way you look at the data: by socioeconomic household characteristics and distance moved. And this has change little with the current crisis, probably because the additional incentive to move (as there is substantial evidence that some structural mismatch, including a geographic mismatch, has increased the unemployment rate recently) has been roughly compensated by the poor saleability of homes. Still, internal migration rates are still higher than almost everywhere else.

Pricing Asian options

Options are securities that are difficult to price. In particular American options, which can be exercised at any time posed a serious challenge that could only be solved in approximation with some Nobel Prize winning work. European options are simpler because they can only be exercised at maturity. Today, I learned there are also Asian options. Asia seem really to catch up in all aspects of economic life. Asian options are American options with the difference that the exercise price is some form of average of the underlying price.

Paolo Foschi, Stefano Pagliarini and Andrea Pascucci provide a way to price Asian options in a first approximation under local volatility, that is the price volatility depend on the current price level, and provide an algorithm for higher order approximations. As you may guess, it is not straightforward. Along the way, I also learned about the Greeks in option pricing. They measure various aspects of the sensitivity of option prices to underlying parameters, and they are usually represented by Greek letters. Now that I have learned that, I'll leave the actual pricing of Asian options to others.

Greening production through information

People in general prefer green products, although they are not always ready to pay a significant markup for a greener product. If they know that a product has been manufactured using green procedures, there will attach more value to it if the claim is credible. Several green labels, supposed to certify such claims, have emerged, but none have much recognition, in fact one sometimes wonders whether some of them are really weak.

Another approach is voluntary disclose of pollution emissions and other environmental disclosures by the industry. This is reviewed by, take a deep breath, Venkatachalam Anbumozhi, Qwanruedee Chotichanathawewong and Thirumalainambi Murugesh with a focus on Asia. They highlight that the final consumer is not necessarily the one targeted by this information. For example, some investment funds, in particular sovereign wealth funds, are under pressure to invest in ethical firms. Or potential employees may avoid polluters, and local planning may benefit form the available information, thus encouraging local investment.

The authors argue that there is little environmental regulation in most of Asian, with makes the price of environmental benefits close to zero. If you want firms to start abating, you need regulation, and then they also be willing to should how well they abate, leading to more abatement. In some larger Asian countries, a few modest disclosure programs have started, and they have shown excellent prospect in increasing environmental compliance.

Economic freedom and prisons

Americans are proud of their freedoms, political or economic ones. Yet, they are very trigger happy when it comes to takes one's freedoms, say by taking voting rights from felons, throwing people into prison or even executing them. How could such an apparent disconnect be explained? Why is the US different from Europe, where there is less economic freedom, but also much less punishment?

Rafael di Tella and Juan Dubra note that this apparent paradox does not only appear across countries, but also over time within the United States. For example, over the 30 years including the "Reagan Revolution" that considerably deregulated the economy, incarceration rates were multiplied by seven. They explain this with a theory that states the following. People view that when there are ample opportunities for legal activities in a system where there are many economic freedoms, people who still commit illegal acts must be "meaner" than the average criminal in a world with fewer economic freedoms. This can be supported with some limited empirics, but this is quite an appealing explanation. Indeed, Americans strongly believe that effort, not luck, is the root of success, and thus offer few excuses to those who become criminals out of necessity, an opinion that interestingly more and more African-Americans share.

More on institutions and growth

There a large belief in the development community that institutions matter. This has emerging from a large number of cross-country regressions, regressions that one should always take with a grain of salt because of methodological issues and data quality. However, this result has emerged so frequently that it must indeed matter. But the precise mechanism through which institutions matter of the course of development is still rather unexplored.

Ines Lindner and Holger Strulik come up with an interesting theory. When the economy is fragmented into small regions, entrepreneurial behavior is governed by local and informal enforcement. But as economies become more integrated, through specialization and/or the reduction in transportation costs, "connectivities" go from local to global, and informal enforcement is not sufficient. Formal institutions need to arise, and if they are weak, entrepreneurship will be weak. I wonder, though, how such a theory of networks could be tested in the data.

Who spent the 2001 Bush tax rebate?

Do tax rebate such as those implemented at various times by the Bush II administration work? Measuring this is not obvious. Previous studies have typically exploited the timing of the receipt of the rebate checks to see how expenses have changed. But most people have anticipated these payments, thus the marginal propensity to consume is mismeasured: it measures the propensity to consume due to short-term liquidity considerations beyond the consumption response from the announcement of the program.

Greg Kaplan and Giovanni Violante go a step further in this analysis and build a model that replicates the measurements found in the literature and the large share of hand-to-mouth households using an economy of liquid and illiquid assets with transaction costs. They define hand-to-mouth households as those who hold less that half their periodic pay in liquid assets. That seems very shaky to measure, as the timing of the relevant survey matters a lot here. But assuming there is no systematic error, they then extrapolate through the model what the response from the announcement of the rebate should have been. This adds 7-8% to the marginal propensity to consume. Interestingly, this come in large part form rich household who have only little liquid wealth because their assets are mostly in real estate and retirements funds. An important consequence of this is that larger tax rebates would have little impact, as they would make it more interesting to bear the costs of putting them into illiquid wealth. In fact, the marginal propensity to consume could even turn negative.

Why is blackmail costly?

Blackmail is a strange concept. Threatening to reveal information is legal. Asking money for a service is legal. But doing both at the same time is illegal. Even stranger, when the transaction is initiated by the one who could be harmed by the revelation, this is technically a bribery, it is legal. So why this difference? The conventional answer is that blackmail is about rent-seeking. But if the damaging information is freely available, there is no welfare loss justifying the criminalization of blackmail.

Oleg Yerokhin claims the justification can lie within the bargaining power structure between the two parties. Indeed, when the information holder is a monopolist, he will have more power than socially optimal, and should thus be punished to internalize this cost. But when the target is a monopolist, then the outcome reverses, and the blackmailer should be subsidized rather than punished. Yet, I hardly find this argument convincing on the grounds that blackmailers are certainly less likely to be monopolists than victims. Indeed, information is duplication at zero or close to zero cost, making it difficult for a monopoly to arise in such a situation. But this information can easily be about one particular person only.

Near rational agents and house price booms

House price run-ups, especially when they appear excessive, are difficult to explain. It is it even more difficult to explain how they are not coordinated across countries in a globalized world. Indeed, right now house prices are severely depressed in the United States, while you can have strong suspicions of bubbles in China, Norway and Switzerland. Bubbles are substantial deviations from fundamentals that could be due to some deviations from rationality or herd behavior, or both. But "rationalizing" this is a major challenge because of the apparent randomness of the occurrence of such house price booms.

Klaus Adam, Pei Kuang and Albert Marcet think they have a way to explain this using the concept of internally rationally agent. Such a agent, like the economist, does not know the true process of prices but tries to infer it from past observation using Bayes' rule. The belief about prices then becomes part of the state space and leads to some sort of path dependence. With shocks that are not perfectly correlated, it is then possible for different countries to experience different paths for house prices.

Why September 11 is remarkable

Amid the commemoration of the 10th anniversary of the terrorist attacks of September 11, 2001, I cannot help thinking how successful theses attacks have been. For an organization that wanted the United States to pay for sending troops to Saudi Arabia during the first Gulf war, a relatively little investment paid huge dividends. Indeed the cost of the operation, including training, must have cost only something to be measured in millions of dollars and the lives of 19 volunteers. The return was getting the United States involved in two wars that have costs amounting to trillions, brought the federal government in major financial difficulties, have lead authorities to neglect essential infrastructure investment for a decade, has kept the population in a nevrotic state for a decade, has given us higher oil prices (with revenue going you-know-where) and has lead to major setbacks in civil liberties. And that is just for the United States, as Europe has also been affected. And the costs will continue to mount, as the US is none the wiser and will have to face in addition the costs of care for veterans.

The impact of fiscal uncertainty

Current US fiscal policy is absolutely frustrating. There does seem to be a clear direction, in particular because policy making is rather irrational due to a set of unduly influential and crazy lawmakers. In the end, this means considerable uncertainty about future fiscal policy, in particular because it may not react to economic events in ways that make economic or historic sense. What is the impact of such uncertainty?

Jesús Fernández-Villaverde, Pablo Guerrón-Quintana, Keith Kuester and Juan Rubio-Ramirez address this with a New Keynesian business cycle model that feature variable volatility in fiscal policy. Their conclusion is that the current uncertainty lowers activity and has the policy equivalent of a 25 basis point increase in the federal funds rate, which I find rather minor. The model rightfully yields that the main mechanism is through investment and the uncertainty on capital return taxation. I find it interesting that it leads to stagflation, as firm opt for higher prices to reduce miss-pricing costs. In the end, the authors show that if one removes the usual automatic stabilizers and assume very persistent fiscal shocks, which may be a good characterization of the current situation, the prediction is a 0.5% reduction in output, which I am ready to believe.

The polygyny-slave trade connection

Polygyny, a male marrying several females, is now rare except for Africa and especially Western Africa. Why would it be so prevalent in West Africa? To sustain polygyny, one needs an unbalanced sex-ratio, which is not the case there.

John Dalton and Tin Cheuk Leung claim that this is just a matter of very persistent institutions. Indeed, the sex-ratio used to be unbalanced for extensive periods in West Africa, and in a more pronounced and persistent way than anywhere else, due to the slave trade. Indeed, it took away many males from the region through the actual forced emigration, but also because of the many tribal wars associated with slave capture raids (which Dalton and Leung do not take into account).

Econophysics: an introduction

I have criticized a number of times Econophysics as a rather naive venture of physicists into Economics, where there is too much focus on "automatic" data exploration and too little use of theory and understanding of what the data measure. But may it is just my prejudice against and my ignorance of Econophysics.

B. G. Sharma, Sadhana Agrawal, Malti Sharma, D. P. Bisen and Ravi Sharma offer in six pages an account of what Econophysics is, what its goals are, what it can contribute and where it is headed. The basic idea is that economic agents are like particles in that they are in large numbers and interact in complex ways. The dynamics of such complex processes are studied with powerful statistical tools in Physics, and physicists think that this should also apply to Economics. The focus is very much on the stock market, probably because physicists have realized where money can be made. There is no sense that there would be an attempt to improve welfare. They are also much more likely to completely discard a model in one set of observations does not corroborate it. Physicists are especially critical of how economists stick to rejected dogmas and of their inability to explain how small shocks can pan out into large crises.

The focus is really on the description of data process and documenting there statistical properties. In particular, econophysicists want to find ways to exploit even the smallest opportunities for arbitrage by finding, often through obscure and complex black box processes, the right price of an asset at any moment in time. However, there is no attempt at understanding why these arbitrage opportunities arise, say because of some form of irrationality, asymmetric information or perverse interactions in the price mechanism. From this I conclude that Econophysics can be interesting to make money on the stock market, but at least at this point, does not help us in any way in understanding why the world is like it is. Which I find rather ironic for Physics.

Progesa: a success story thanks to academics

I have written a few times about the frustration when policy makers ignore the advice of economists. Yet, there are a few cases where economists were given free reign over the design of policy interventions, which not only allowed to obtain positive outcomes but also useful information for further study.

Nora Lustig reports about Progresa, the Mexican cash transfers program designed to elicit parents to send their kids to school and make sure necessary health check-ups were attended. From the start, the program was designed and administrated by people with an academic background. Progresa has worked remarkably well, to the point that it was not only not scrapped, as is usual, with presidential changes, its coverage also kept increasing. The only setback was a name change to Oportunidades. The critical ingredient to this success was the scholarly involvement, that not only designed it for success, but also provided the tools to measure this. And along with that a wealth of data that has allowed to understand even better what makes good intervention in practice.

Emotions in economic interactions

How do you get people to cooperate. By increasing utility, of course, but that is difficult to measure, obviously, and there may some components beyond rationality in emotional contexts. However, we have some interesting ways to get some neurological hints about positive and negative emotions by measuring the conductance of skin. This may help to explain why people are sometimes willing to hurt themselves in order to punish others.

Mateus Joffily, David Masclet, Charles Noussair and Marie-Claire Villeval conduct an experiment where cooperation, free-riding and punishment can happen. They measure skin conductance to reveal the intensity of emotions and let players reveal whether their emotions are positive or negative. Cooperation and punishment of free-riding elicit positive emotions, the latter indicating that emotions can override self-interest. That is also because punishment relieves some of the negative emotions from observing free-riding. And one does not like being punished, which lends one to cooperate more in the future. Finally, people like being in a set-up where sanctions are possible, in particular because it allows a virtuous circle of emotions that reinforce each other and lead to more cooperation.

The Bruno Frey Bubble

About four months ago, I reported about the apparent self-plagiarism by Bruno Frey, David Savage and Benno Torgler. I found the case particularly ironic, as Bruno Frey repeatedly wrote about the fact that the pressure to publish to get tenure can lead to scholar to unethical behavior, and about the lack of space in journals for young scholars to publish the articles needed for tenure.



The case has taken a much larger dimension now, as many more cases of self-plagiarism by Bruno Frey and his students have appeared (see many links in the comments on the post mentioned above). This raises two very important questions: 1) how could such a culture of self-plagiarism arise? 2) How could they get away with it for so long?



To answer the first question, I think we need to put Bruno Frey is the context of the German(-speaking) academic environment. At least in Economics and Business, the typical German professor publishes a lot of rather insignificant articles, in particular book chapters and "Festschrifts." These works are rarely original, and are not expected to be so. There is also a tradition of writing "educational" pieces that explain economic concepts, say the Edgeworth box or voluntary export restraints, for journals targeted towards professionals in industry and government (as well as students). Again, there is nothing original in there, except maybe the way something is explained.



Bruno Frey works within this paradigm. His work lacks creativity in the sense that he recycles a lot of his ideas for multiple publications, often copying extensively his own words. The differences is that he does that at a higher level than his German colleagues, in international journals that are actually read. And many of his original papers are in fact not that original it appears. If we take the Titanic paper as an example, the empirical exercise he performs is routinely done in undergraduate statistics classes with the same dataset. His contribution is pedagogical, he found a good and interesting way to explain something already present in the body of knowledge.



Like a bubble that keeps getting fed by self-fulfilling expectations, Bruno Frey built on his initial success and continued with this strategy and encouraged his students to do the same. And several of them have assembled remarkable portfolios that way. I mentioned that of Benno Torgler in my original post, but there are several others who got into positions that seem beyond the usual reach of a Swiss doctoral program.



There is another way in which this resembles a bubble. The Economics department at the University of Zurich has made considerable efforts over the past decade or so to become a program that can compete with the better departments in the world. It is certainly among the best in Europe. It did so by americanizing itself: dropping to a large extend the rigid chair structure so prevalent in German speaking universities, hiring internationally respect scholars and creating a proper PhD program with courses and exams. Bruno Frey has not followed this trend at all. In fact, he insisted on exempting his students from the course and exam requirements. The Frey group lives in a cocoon apart from the rest of the department, and lives entirely following the role model of Bruno Frey. Call this living in a bubble.



Or a cult. The interaction of Bruno Frey and his students is reminiscent of a prophet and his disciples who follow him everywhere and write down every word he utters. Well, I exaggerate somewhat, but this does definitely not look like a standard interaction between a mentor and his students. It looks like they follow him blindly, and with his everlasting confidence, he makes them follow his example in publishing.



But this bubble is now popping under the assault of widespread scrutiny from editors, the Economics community and an internal investigation at the University of Zurich. The second question of course is how it was possible for Bruno Frey to act so unethically for so long (he is 70). It appears that he has been caught in the past, but it never became public, or at least explicitly. For example, he has been booted out of an editorial board, but there was no mention of why, his name just disappeared from the list. Also, the journals he has been publishing in are often not prominent and thus not that well read. In fact, it looks like he targeted them so that the audience would not overlap, including editors and referees (the added bonus of this strategy that it satisfies the goal of increasing the pedagogical reach by reaching very different audiences).



Hiding this unethical may have been helped by the fact that Bruno Frey actually tried to present himself as an expert on publishing ethics in Economics. He has written about the perils of publication pressure and how this can lead to slicing papers into insignificant bits, to self-plagiarizing and other unethical behavior. He has complained loudly about the ranking craze which he has been so adept to exploit, both with his self-plagiarism and by requiring authors to cite other works in Kyklos to increase its impact factor. While he is certainly not the only editor to do so, it is ironic that he openly campaigned against such practices. Bruno Frey abused the moral high ground in which he pictured himself.



But as every lie that grows too big over time, this is unsustainable. And it will be less likely to happen in the future with initiatives like this one. Making this unethical behavior more visible will prevent it.



That said, self-plagiarism is not limited to the Bruno Frey group or German speaking economists. I will discuss soon another case that I find particularly enraging.

Taking peak oil seriously

For about forty years now, individuals and organizations have warned of peak oil and predicted a particular date for this event, which is inevitably associated with some sort of impeding doom. Yet, their predictions have not come to fruition (yet). Indeed, there is very little economics in those predictions beyond extrapolating trends. Economics has much more to offer in this regard.



Indeed, theory would tell you that an exhaustible resources would be used up at a decreasing rate as long as there is a positive discount rate, thanks to increasing prices for this commodity. Yet we seem to observe increasing consumption. Stephen Holland offers several explanations why peak oil may arise as an equilibrium and optimal outcome. There are four ways that can lead to upward-trending oil production, at least for some time: increasing demand, increasing reserves, technological change and site development. Demand and reserves are easy to understand, the other two need explanations.



Technological change can lead to increasing production through a decrease in the cost of drilling. The end effect is similar to discovering accessible reserves. As for site development, the idea is that the most promising sites are developed first for extraction, and the next ones come online while the previous ones are not done yet, yielding a temporary increase in production. And I would add a fifth reason for a temporary increase in production: the introduction on alternative fuels. Overall, the general picture that emerges is that in the long run production decreases, but there may be bumps along the way. But if price play their role, their is nothing evil in peak oil.

Are income-contingent loans for higher education feasible?

There is considerable discussion, in particular in the UK, about making education loans contingent on realized income after completion of education (and those who do not graduate have the loan paid by general taxes). On the face of it, it makes much sense as those who reap the most benefits from their education pay the most for it. But the bigger advantage is thought to come that such a scheme would help overcome risk-aversion, educational outcomes are risky after all, and thus help more people to get higher education. Also, because education then does not require upfront payments, it helps alleviate liquidity problems young people typically face.



Elena del Rey and María Racionero see that this is not that easy to implement. Indeed, some people would loose if such loans would be implemented, foremost those who do not need loans (but this can be reversed if they are very risk averse) and those who are little risk averse. Regarding education subsidized from general taxation, those who can afford private education are again opposed, as well as those who are less able to acquire higher education. If one were to choose between the two financing schemes, it would all depend on the political power. If we assume everyone has a vote of equal weight, then all boils down the level of risk aversion of the population, the distribution of which we know very little about, and the aptitude to education, which is rather uncertain at the individual level. So in the end, we are not much wiser.

Make social security contributions more visible

Any tax on labor income reduces the labor supply depresses the labor supply, this is no secret. Theory also tells us that whether the employer or the employee pays any withheld tax does not matter. Contributions to pension plans, which are typically paid by both employers and employees, look like a tax on the pay stub and should thus obey the same principle. Well not quite.



Iñigo Iturbe-Ormaetxe argues that the size of the pension fund contribution says something about the future benefits. If the employer contribution remains hidden, the employee is not aware what great benefit he is getting. Were he to pay the whole contribution, after a corresponding pay rise that is revenue neutral to the employer, the employer would be happier about his pay and would increase his labor supply. It would work similarly if the employer would simply indicate on the pay stub her contribution. This assertion is backed with a crude cross-country regression of employment rates in the OECD which shows that at least male employment rates a negatively affected by employer contributions, but not by employee contributions.

Tax reform: Politics has more weight than Economics

One of the great frustration as an economist is to know what is best and being told it is "politically unfeasible." And why is it typically unfeasible? Because the "right" people do not like it, because it sounds complicated, and because populists would have a feast opposing it, or a combination of the three. How much is this frustration really justified?



Micael Castanheira, Gaëtan Nicodème and Paola Profeta look at the reform of labor income taxation in Europe and find that it is very consistent with the theory that politics shapes taxes more than economists. Indeed, the size of the ruling party or coalition is the main factor: instead of a compromise, which would likely be close to the outcome a social planner to choose, the rulers select what is best for them without regard for the others, or just enough regard to prevent a revolt (that is my interpretation). And then people blame economists when things do not go right.



I'll go weep in a corner now.

Market failure and political outcomes

In a perfect economic world, perfect competition and the lack of frictions or externalities make it possible to obtain the most efficient outcome. But once any of those assumptions is lost, outcomes are going to be worse than the first best. In particular, once there are rents to be obtained, from frictions or imperfect competition, the beneficiaries of those rents will try to protect them. And they will try to influence political outcomes in their favor.



Madhav Aney, Maitreesh Ghatak and Massimo Morelli argues that this influence peddling reinforces the market failures. As an example, they take a model of misallocation of entrepreneurial talent due to the imperfect observability of that talent. The resulting power structure then votes on institutions that reinforce such a class structure and thus amplify misallocations and market failures.



Now think about the apparently ever-increasing proportion of lawyers in the political class.

Was medieval seigniorage welfare improving?

The presence of coins improves social welfare, as it allows for more trades than barter would allow. Coin minting also provides income to the minting authority, as it can buy stuff with coins that have more value than their production cost. This is called seigniorage. This was also the case in medieval times, where "seigneurs" would mint gold or silver coins with somewhat less metal content than indicated and thus get income. One would thus think that these minters would be profit maximizing, and thus enhance welfare only as a by-product.



Angela Redish and Warren Weber say this is not quite true. They build a random matching model of commodity money, where the supply of silver is exogenous. They derive the welfare maximizing size and quantity of coins as a function of the quantity of silver and the probability of acceptance of cash. Using data from medieval Venice and England, they find that the model predictions follow remarkably well the historical record. This probably means that authorities were benevolent. I say probably because they may have acted in the same way out of selfishness, but that is not documented in the paper. Indeed, the model assumes than any holder of silver can mint, while in reality a limited number of people could do that.

How to tax addictions

Addiction is most often a problem of self-control. If one is not capable of factoring in the future consequences of one's actions, one way to make this is taken into account is to distort prices appropriately. This is what taxes (and subsidies) are good at. While we know rather well how to design taxes on externalities born by others or the community, the case is more difficult for externalities inflicted on future selves.



Luca Bossi, Paul Calcott and Vladimir Petkov get on the case i the context of externalities, self-control issues and imperfect competition, as applicable for cigarettes and their highly concentrated industry. They also implement time-consistent taxes to accommodate the addiction, which means that people or government would not want to deviate from the social optimum. Taxes are thus state dependent and described by a rule. One important result is that combining addiction and imperfect competition leads to lower taxes that previously reported, because prices are already higher to start with if providers are oligopolistic. Were some drugs to be legalized, one has thus to keep in mind that the new market structure matters in the design of the new taxes.

Keep CEOs off outside boards

Should CEOs take outside mandates? For share holders the question boils down to firm performance. If this allows the CEO to peak in management practices at better places or even collude, then this is good for the bottom line. If the CEO dilutes his efforts by being unfaithful, then this hurts the company. In the end, we needs to see what the data says.



Benjamin Balsmeier, Achim Buchwald and Heiko Peters look at CEOs from the 100 largest German firms in a panel dataset. And it does not look good. Firms with CEOS directors elsewhere have a return on assets over one percentage point lower. You would think that this should have consequences. Yet, such CEOs are less likely to be ousted than loyal ones. This may corroborate the entrenchment hypothesis, as I discussed before. The lack of competition at top clearly shows.

Teenage achievement and the house price bubble

The general economic context of where and when you grow up matters. Think, for example, of those raised during the Great Depression in the US or World War II in Europe who are likely to be very careful with their spending, never through anything away and finish their plates. In this regard, what should we expect from those reaching adulthood in the past years?



Daniel Cooper and María José Luengo-Prado study the impact on teenagers of the house price boom before the current crisis in the United States on educational outcomes. Using the Panel Study of Income Dynamics (PSID), they find that a 1% higher house price at age 17 leads to a 0.8% higher income as adult if the parents owned the home, 1.2% lower if they were tenants, after conditioning for socio-economic characteristics. These are big numbers. They can be justified by the observation that higher house prices allows more collateral to borrow for education. Indeed households with a below median non-housing wealth saw even a 1.6% boost in their child's future income. To explain the impact on tenants, I suppose one can explain it with higher tuition in reaction to larger loans, which tenants cannot afford as well.



The consequences from the recent house price crash are daunting in this context. And given that state are disengaging themselves from financing their public colleges, leading to even higher tuition, the outlook is even worse.

File sharing and the structure of the music market

For as long as music has existed, artists have lived from performing. The advent of packaged music (radio, TV, disk, tape or CD) has changed little to this, as the new medium has been more about promoting the artist than making money for the artist, with few exceptions. The ones making money from sales are the record companies, and the appearance on file-sharing is challenging their business model while not affecting the artist's way of living. In fact, the latter appreciate the zero marginal cost promotion. But the record companies want to survive.



Ralf Dewenter, Justus Haucap and Tobias Wenzel study the interaction of record and ticket sales under the assumption that both benefit from each other. Clearly, the impact of file sharing is ambiguous: it may increase record sales if people discover an artist through file-sharing and attend a show. But some potential sales are lost when a very close substitute is available for free. The solution for the record companies to to take over the management of concerts as well. Whether the artists want to go along with that is another question.

Do we need awards in Economics?

I do not like awards. They always create jealousies, and one cannot help that whenever a committee is involved, something may not have gone right. I am thus quite happy that economists give very few awards. It makes their CVs look bad compared to other scientists, but that is the price for a relative peace in the profession.



But we still have some prizes. The Nobel one, which is not really part of the Nobel family but is still attributed much prestige is always under much scrutiny. And in the end, the right people tend to win it. There have been a few controversial cases, Myrdal, Hayek, Buchanan and Ostrom come to mind as example where quite a few eyebrows were raised, but overall this award works well.



The American Economic Association gives an award that is considered to be even more difficult to get than the Nobel Prize: the Clark Medal, given to an American aged under 40. It is difficult to get because only one is awarded every year (no joint winners) and until recently it was given every second year. When comparing to the Nobel Prize, it is relevant to understand that American get a vast majority of them.



Now let us have a look at the past few year for the Clark award:

2011: Jonathan Levin, PhD MIT, Faculty at Stanford

2010: Esther Duflo, PhD MIT, Faculty at MIT

2009: Emmanuel Saez, PhD MIT, Faculty Harvard then Berkeley

2007: Susan Athey, PhD Stanford, Faculty at MIT then Stanford and Harvard

2005: Daron Acemoglu, PhD LSE, Faculty at MIT

2003: Steven Levitt, PhD MIT, Fellow at Harvard then faculty at Chicago

2001: Matthew Rabin, PhD MIT, Faculty at Berkeley

1999: Andrei Shleifer, PhD MIT, Faculty at Princeton, Chicago and Harvard



Do you see a pattern? Well I do, and others have, too. I am not saying these awardees are not bright and promising economists, but is there really no other qualifying economists that could have received it? Of course, John List comes to mind, who has no connection with MIT (or Harvard). But it actually worse than that. The award is given by a small committee, designated by the AEA. The AEA leadership is stacked with people with MIT and Harvard connections, so they also nominate their friends to the various committees, and you see the result.



It is even worse. In 2010, Ester Duflo was considered to be in the pool of strong candidates for the award. Guess who was on the awarding committee? Abhijit Banerjee, her PhD advisor, frequent co-author and colleague at MIT. In such a situation, an ethical person would decline the invitation to serve on the committee. That does not seem to have crossed the mind of Banerjee, who may be used to this cronyism.



There is another award, this time given by the European Economic Association: the Yrjö Jahnsson Award, to an European economist under age 45. It is given every two years, but can have several recipients. This awards has looked much cleaner because the committees and awardees have been distributed all over Europe. Europeans are indeed very sensitive to this. The last one was a shocker, though. Armin Falk won it to the surprise of many. And guess who chaired the awarding committee? His advisor, Ernst Fehr. Again, ethics would have indicated that if Falk had a chance of winning it, Fehr should have recused himself not just from chairing the committee, but from participating in it. In retrospect, this is not Fehr's first wrongdoing: two years earlier he was also on the committee when Fabrizio Zilibotti co-won the award. Zilibotti is a colleague of Fehr in Zurich.



I think we should do away with these two awards. It simply does not work.

Trust in private money

Money does not have to be supplied by government. Private money could work under some circumstances, and it has in particular been argued that competition should be beneficial. While previous attempts have failed, the wider availability of information, rating agencies (gasp) and information technology could make it happen. So it is of interest to find out what those circumstances are.



Ramon Marimon, Juan Pablo Nicolini and Pedro Teles say that money is an experience good, as you only observes its quality after the exchange is performed. This leads to serious limitations. If issuer of currency cannot commit to not inflate in the future, then competition over currency in the present has no bite. Building a reputation can solve this to some degree, but building the necessary trust means that future rewards must be larger that immediate gains from inflating. That implies that full efficiency cannot be attained: inflation needs to remain positive, while full efficiency implies negative inflation so that money has the same return as a risk-free bond. Unfortunately it also implies that there is indeterminacy and any inflation rate could happen. Oh well, may be the government could step in to help achieve efficiency...

Public consumption and the business cycle

One aspect of government purchases the current crisis has highlighted is how volatile they can be. Quite obviously, they are influenced by politics, to the point of complete reversal between massive spending and severe belt-tightening within months as in the US and the UK. But there could also be a more systematic component that is linked to the business cycle. After all, the government may be trying to improve the welfare of its constituents and for example substitute public consumption for lacking private consumption, or the same for investment.



Ruediger Bachmann and Jinhui Bai look at this using an augmented real business cycle model. They claim that 25-40% of the variance of public consumption can be accounted for by shocks to total factor productivity once implementation lags and costs of public consumption, as well as taste shocks to public vs. private consumption. I am no particular fan of taste shocks, as they are the symptoms of a modeler who is giving up on trying to explain something and simply equates the error term in the Euler equation to a shock. Then much is driven by how this shock is calibrated, in this case to match a four year electoral cycle and some data moments. When I think about shocks in this context, I think indeed about who is in power to decide on public expenditures. But that is not completely exogenous. Indeed, the state of the economy has an impact on who gets elected or reelected. And this can be calibrated without trying to match the data moments one is trying to explain.

Job referrals can be more efficient than open search

I a perfect world with heterogeneous workers and jobs, the matches are those that maximize efficiency. But when information about the quality of either is private and cannot be revealed credibly, the economy quickly looses efficiency. The solution is then to make hiring and firing easy, so that good matches can be found by trial and error. Employers also try to gather information about their potential employees, and their socio-demographic characteristics are certainly among them. While this looks like discrimination, it is OK if it is only statistical discrimination. But one can improve on this.



Christian Dustmann, Albrecht Glitz, and Uta Schönberg study job referrals from co-workers. They find that typically shunned minority workers are more likely to be hired the more other minority workers are already present, a clear sign of job referral. In addition, these workers earn on average higher wages and are more likely to stay in such firms. In some sense, this shows that job search networks can be better than open competition under some circumstances. One could even stretch the argument to claim that favoritism could be beneficial.

Penis size and growth

Understanding why some countries are poor and why some grow than others is probably one of the most important questions in Economics. The traditional tool to tackle this challenge has been growth regressions: use cross-country data and regress the GDP growth rate on various indicators that could be relevant in order to find which matter most. These regressions have been abused over the years, especially as there are obvious endogeneity and collinearity issues. Also, the results are driven by a multitude of (poor) countries where data quality is quite horrendous. The worst is probably all the data mining that is going on in this literature, which culminated with Xavier Sala-i-Martin's two million regressions.



Tatu Westling uses a variable the previous literature completely ignored: the average length of the erect human penis. Adding this variable to the regression shows a U-shaped relationship for the GDP level, explaining 15% of its variation. The optimal penile length is 13.5 cm, and 16cm is disastrous. For GDP growth, the relationship is negative, explaining 20% of the dispersion. This is not negligible, and more than institutional variables that are thought to be the key to growth and convergence.



I wonder how many people will take these results seriously and try to get policy recommendations from it. Westling hypothesize about the impact of self-confidence. The paper is very well written, taking the 'male organ hypothesis' very seriously, but in truth tongue-in-cheek. Very different from this study on flag colors I wrote about previously.

Sustainable retirement pension reform?

With increasing longevity, it is obvious that something needs to be done to keep pension systems around the world sustainable. The main options are postponing the normal retirement age, lowering retirement benefits or increasing contributions. The typical studies that compare these options and are thrown around in the public arena are done by accountants and actuaries, who do not take into account the changing incentives of market participants. Economists can do better.



Peter Haan and Victoria Prowse take up the challenge and estimate a very complex life-cycle model for Germany. It includes idiosyncratic risk, consumption and labor supply decisions and a complex tax structure. They find that the 6.4 year increase in life expectancy over the next 40 years needs to be met either by an increase in the full-pension age by 4.3 years or a reduction of benefits by 38%. The first approach markedly increases the unemployment rate. This is ironic in Europe where a reduction of that age is typically viewed as a way to reduce chronic unemployment among the young. The other option would markedly increase savings, as people have to fend for themselves more. Consumption of retirees is higher in the first option though.



Am I satisfied with this study? It is much better than what you typically see, yet I want more. The easy bit is that one could actually determine whose welfare increases under which option. That could help in understanding the (political) feasibility of such reforms. And maybe a combination of them turns out best. More critically, the model does not attempt to consider the consequences in the changes in aggregate supply. Lengthening the work age this much increases the work force dramatically and must have consequences for aggregate, and thus individual, wages. Also, while the matching probabilities and wages of retirement age workers are estimated from current data, I do not think these estimates apply once more previous retirees are forced into this pool. The new ones have different qualities compared to those who would have continued working anyway. Therefore, I see more work to be done.

Procrastination in team work

Teamwork can turn out very bad when moral hazard is present: if people do not trust each other or care about each other, nothing gets done. When doing research, we are lucky to be able to choose our co-authors, but even then things can turn for the worse if a team member looses interest. And we remember how bad it is when a team is forced upon you during our studies. Now, this is all very loose reasoning, let us get on firmer ground.



Philipp Weinscheink studies team production in a dynamic game with moral hazard. If all players are rewarded equally, they will all wait until the last moment to participate. This is very like what we often see in political negotiations with a deadline, where nothing happens until the last moment, and player consciously wait for the last moment. The same often happens at collective agreement bargaining. And of course, the outcomes are far from optimal, as the debt ceiling mess in the US has recently shown.



If the rewards are not equally distributed, the outlook is better. Quite obviously, those who are rewarded better will tend to procrastinate less. But they are not necessarily better off that those less rewarded, as they put more effort. Thus, second-best contracts are unequal ones. But all this falls apart if some players have limited liability (which means they have better outside options) or if some can sabotage. Then everyone will wait until the last moment and very little gets done. Think about the US situation again...

Has the US economic policy been Keynesian for centuries?

Suppose the abstract of a paper starts with "It is demonstrated that the US economy has on the long-term in reality been governed by the Keynesian approach to economics independent of the current official economical policy." My first reaction is that of puzzlement, as I would not have thought as the US being particularly keen on Keynesian policy, except for the recent years (which are not considered in the quoted study). But again, data may speak differently from policy intentions, so let us dig deeper.



A. (Agung?) Johansen and Ingve Simonsen come to this stunning conclusion by looking at the correlation between (nominal?) (federal?) public debt and the Dow Jones Industrial Average. One can first question whether public debt is a good indicator of Keynesian policy. Public deficits or even public expenses would be better. And does the DJIA represent the US economy? It is certainly not an indicator of current activity, but rather of expected present value of future profits from a particular class of firms.



Whatever. Let us go with that. The analysis is done by computing over the 1791-2000 sample a sliding correlation between these two indicators over a five-year window. Surprise, the correlation is zero most of the time, except during some wars when it is strongly positive (and strongly negative during the second war with the Seminole Indians). From this they conclude the Keynesian policy was mostly pursued during wars. Now let us take a step back: the authors show that there is by their definition no Keynesian policy during peacetime. But during wartime, the government is credited with a policy geared towards expansion of the DJIA. They, one may ask, if this is the government overwhelming policy, as the authors seem to believe, why did the US wait so long to get into the two World Wars when the opportunity was there? I cannot make sense of all this.

Land titling and access to credit

It is widely believe that a key ingredient of economic development is the accessibility of credit. Indeed, entrepreneurs typically need credit to develop their business plans, and much of capital accumulation is performed through credit. But no one is going to grant credit on a promise, some collateral is needed. And that is a problem in many developing economies, as people hold little property and even land is communal or without clear property rights. Hence the idea that distribution of untitled land, with well-established property rights, should provide collateral to a large fraction of the population and make credit possible. How does this work in practice?



Caio Piza and Maurico Moura study the case of a major land titling initiative in Brazil. They use an interesting natural experiment. Two neighboring and very similar communities of the city of Corosco (correction: Osasco) were to get property titles for every inhabitant, but five year apart (2007 and 2012). This leads to a nice control group, which allows to overcome the problem of the endogeneity of ownership rights of a typical study by using a difference-in-difference approach. Indeed, the authors conducted a survey in 2007 before the titling, and another one in 2008. In addition, the context here is urban, which is unusual for a titling study. It appears access to credit increases by 22 percentage points, or about a half, within 18 months of titling. This is major. I do not think such large estimates have been found in rural studies. And given that developing countries become increasingly urbanized, this is very interesting.

Convergence in recessions

Growth theory and data teach us that, at least in developed countries, economies tend to converge in the long run: the dispersion across regions or nations of per capita income (or similar indicators) tends to decline. While this is a long term phenomenon, there is a priori no reason to believe this is a constant process.



Eldon Ball, Carlos San Juan and Camilo Ulloa study total factor productivity in agriculture across US states. While they indeed find a general trend towards convergence, it turns out that its speed is much faster during recessions. Why would this happen? If we follow Schumpeter, the worst firms should be dropping out during a recession, thereby relatively increasing TFP in the worst areas. And voilà, you have faster convergence. But only farm-level data would tell whether my conjecture is true.

What if the US looses its reserve currency privilege?

Since the Bretton Woods agreement in 1945, the United States have enjoyed the so-called "Exhorbitant Privilege." During the fixed exchange rate regime, the US could conduct monetary policy without regard to what was happening in other countries. The US dollar was a reserve currency, which also helped the US maintain low interest rates and a guarantee that US dollars (and Treasury bonds) would always find a buyer. With flexible exchange rates, not much has changed. But with the recent shenanigans in a Congress that considered reneging on its debt, the likelihood of this advantage changing has dramatically increased. What would the consequences of the loss of the Exhorbitant Privilege be?



Wenli Cheng and Dingsheng Zhang study this scenario using a general equilibrium model where a peripheral country (say, the Asian economies) pegs its currency to the money of a central country (say, the United States), the latter being used as the vehicle currency for international trade. In addition, the foreign exchange reserves of the periphery are invested in government bonds of the center. This means that no matter what current account deficit of the center, it is always financed by the periphery. Yet the center may be tempted to inflate it away. This limitless and to some extend free borrowing is the Exhorbitant Privilege.



Now remove it by assuming that the periphery does not want to invest in the center, either because it views the Treasury bonds are excessively risky or because it does not peg to the dollar any more. This would lead to a dramatic readjustment of the terms of trade to favor the tradable sector of the center. This decpraciation of the dollar would be more pronounced of the center is incapable of raising taxes and finances its debt with inflation. This already all sounds familiar.

About very large risk aversion estimates

The equity premium puzzle is an enduring challenge to our estimates of risk aversion. Indeed, as Rajnish Mehra and Edward Prescott have highlighted, the only way to reconcile a standard model with the observed long-term equity premium is to assume a risk aversion coefficient of 10, while micro-estimate hover around two. This puzzle has been resolved a little bit in various way, most prominently by taking into habit persistence and some other deviations of the standard CRRA or CARA utility functions. But all this still boils down to a risk aversion parameter that is linked by an identity to the intertemporal elasticity of substitution (it is the inverse). But we know how to disentangle the two.

Xiaohong Chen, Jack Favilukis and Sydney Ludvigson estimate a model with the recursive preferences of Larry Epstein and Stanley Zin and Philippe Weil. This is not obvious to do because to estimate the coefficient of risk aversion in this context, one needs a measure of claims to future consumption. Here this is overcome by estimating nonparametrically the continuation value of the consumption process from within the model. The result is that the elasticity of intertemporal substitution is above one, and the coefficient of risk aversion is somewhere between 17 and 60. These are huge numbers. But they still imply a rather modest and sometimes even negative risk premium.

Aid and remittances as hedges against food price shocks

Food is a substantial part of household expenses in developing economies, and in many of the latter foreign aid and remittances from emigrants provide a substantial part of national income. As world food prices have been subject to large fluctuations lately, causing much grief and even riots, it is natural to ask whether aid and remittances can provide some smoothing against the effects of these fluctuations.

Jean-Louis Combes, Christian Ebeke, Mireille Ntsama Etoundi and Thierry Yogo use a cross-country panel data set to study this question. First, they confirm that food fluctuations have a notable impact on aggregate consumption, especially in the poorest economies. Second they find that aid and remittances do help, and remittances seem to be more efficient at hedging. Indeed, an aid-to-GDP ratio of 29% is theoretically necessary to absorb food price fluctuations, while 9% is sufficient is for remittances. Only Mozambique and Nicaragua satisfy the first, while a few more countries satisfy the second.

How is China now planning its economy?

Since 1978, China has undergone a fundamental and very successful reform from a planned economy towards a market economy. But one should still keep in mind that this is still an autocratically governed country where technocrats call the shots at all levels. China is still working with five-year plans and the economy is still tied to administrative goals. SO how does economic planning work in China nowadays?

Gregory Chow offers some insights, in particular on how this planning has recently become more important due to the global economic crisis. Administratively, policy is guided by the five-year plans, which interestingly have recently included new sections on welfare and management of society, making apparent some worries about the adverse effects of market economies and rapid development (or democracy when people can complain?). The remarkable part of these plans is that explicit targets are set, and policy is in a major way oriented towards these targets. Of course, the government still controls directly a considerable number of state-owned enterprises. And it has the traditional tools of policy in a market economy at its disposal to influence the rest of the economy. These policies are coordinated at all levels thanks to the very central nature of government.

In some sense it would also be good for market economies to also set some targets for policy. In fact, this is what politicians should be arguing about and then let technocrats put policy in place to achieve these targets. I would not mind targets like putting a man on Mars by 2020, making sure everyone in covered by health insurance by 2015, get 50% of commuting kilometers on public transportation, or defense expenses being completely dedicated to defense (and not attack) by 2015, for example. In fact, the World Bank has well-defined targets for developing economies. In do not see why this should not be applicable for developed ones. At least it would make governments capable of rallying support for some goals and be explicitly accountable.